We respect your email privacy. Currency hedging can be confusing for investors who use index funds and ETFs that hold foreign stocks or bonds. The basic idea, which I have written about before , is not terribly hard to understand. If a Canadian buys an unhedged index fund that tracks US stocks , her returns will suffer if the US dollar declines against the loonie.

If a fund uses currency hedging, however, you can expect the same return as the underlying stocks, regardless of the currency fluctuations.

But things get complicated when there is more than one foreign currency involved. The iShares MSCI EAFE Index Fund XIN covers more than 20 countries, and the stocks are denominated in British pounds, Japanese yen, euros, Swiss francs, Australian dollars and a few others. The hedging strategy is designed to eliminate the effect of fluctuations in all of these currencies compared with the loonie.

So investors in XIN should expect the same return in Canadian dollars that local investors in Europe, Asia and Australia receive in their own currencies.

If you expect the Canadian dollar to remain strong against most or all of these overseas currencies, then it makes sense to use XIN. However, if you do not want to incur the added costs of hedging or if you share my opinion that exposure to several currencies diversifies to your portfolio , then consider an alternative such as EFA or VEA.

Others have taken the opposite view, arguing that now is a good time to buy these ETFs, because the US dollar is so low. This confusion is understandable, since both EFA and VEA are bought and sold in US dollars. Remember, however, that the underlying stocks are denominated in a basket of overseas currencies.

Therefore, the strength or weakness of the US dollar has no effect on the return that international equity ETFs deliver to Canadians. I recently spoke with Vikash Jain, portfolio manager at archerETF , an investment firm with a global outlook.

He clarified this idea using the example of a Canadian buying a US-listed ETF that holds stocks denominated in euros. Now you have bought US dollars and sold US dollars — so the transactions cancel each other out, and therefore you have no US dollar exposure.

However, you sold Canadian dollars and you bought euros. So now you are negative Canadian dollars and positive euros. You may incur currency conversion costs when you buy and sell these ETFs on the New York exchanges, but you will not be exposed to the US dollar in any way. But how does taxation fit in? If I put US listed ETFs in a US dollar account do all dividends etc stay there and not generate currency conversion costs.

Actually US-listed ETFs can be more tax-efficient than their Canadian versions. If a US-listed ETF is held in an RRSP, there is no withholding tax on dividends.

In a taxable account, the tax is withheld, but it can be recovered when you file your tax return. If you hold XIN or a similar fund, the withholding tax is paid by the fund itself and subtracted from your return, even in an RRSP.

Remember to keep the withholding tax in perspective. Yes, if you can hold a US dollars in your account which is the case with all taxable accounts , the dividends get paid in US dollars and there is no forced conversion.

Currency Hedging and US Equity ETFs [Archive] - Canadian Money Forum

Unfortunately, most RRSPs force you to convert the currency, but this is a small drag on returns. Other posts that might be of interest: That may be true. I have set some very broad ranges for each of these around targets.

The target was picked by imagining, or taking a best guess, as to where we would be most likely spending our retirement funds. We are dreaming of spending 3 or 4 months in the southern US or Mexico and, in a perfect world, a month or so in Europe.

Buying VTI to take advantage of a low US dollar is fine, because VTI holds US stocks.

But VEA is not cheaper when the US dollar is low. This is a common error, which is why I wrote this post. If you have US-listed ETFs in a retirement account, then there is no withholding tax.

The tax is only in effect if you have a Canadian-listed ETF that holds a US-listed ETF inside it, such as XIN or XSP. See this post by Canadian Capitalist: So this policy will ONLY apply to RRSPs. I wrote a detailed post on the currency effects of owning foreign stocks listed in US exchanges here: Thus, withholding tax is not charged.

If you hold XSP instead, the withholding tax paid by the fund can never be recovered. True, it is a small amount — but paying unnecessary costs are anathema to the Couch Potato philosophy. They are ultra-low cost and as others said, with the dollars at par near 1.

This is indeed a good option: Agreed, as long as you are talking about Vanguard ETFs that hold US stocks as opposed to international stocks. I know bid-ask spreads are what counts, but still… I find XCS a tad thin, so you can guess what I think of HXS — which otherwise is a perfect fit for me will be used in a taxable account since my registered is filled up. I contacted Horizons who confirmed the following:.

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For example, Intel INTC trades in US dollars, but has a significant percentage of sales and expenses in non US markets. Consequently I would expect even many US traded companies such as Intel are not as vulnerable to the US dollar as many believe. This issue with the withholding tax always confused me. TFSAs are not retirement accounts, so they are not included in the agreement.

The same is true of RESPs. I know this is a old post. But I am still confused! If this is the case, then why do you suggest using RBF instead of NBC in the internalional portion of the Global Couch Potato portfolio? I should probably switch this recommendation when I next update the model portfolios.

This clarifies the logic. I had been wondering about this for many weeks believe it or not. I became a DIY investor last October, I am still pretty confused on this kind of subjects. Your blog is my first source of information: I often need to re-read your posts many times before I understand what it is your are speaking about, so I thought I was just misunderstanding. The basic idea, which I have written about …… […].

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Model Portfolio Update for A Case Study in Currencies. Canadian Couch Potato April 4, at J from Ottawa April 4, at Doug April 4, at 5: Canadian Couch Potato April 4, at 5: Simon April 4, at Canadian Capitalist April 5, at Hurler April 5, at 9: Dong April 5, at I am personally a big fan of US ETF, especially from vanguard.

Canadian Couch Potato April 6, at 1: April 6, at 1: Canadian Couch Potato April 6, at 8: I contacted Horizons who confirmed the following: Given that HXS is only a few months old, its small size is not surprising. Chris Bowler April 6, at 9: Open source portfolio April 8, at 1: Canadian Couch Potato April 8, at 1: Soso March 1, at Canadian Couch Potato March 1, at Mark Candow January 13, at 5: Leave a Reply Click here to cancel reply.

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